What Is a Charitable Trust?

Finances
Volunteers take donations on a sunny day in a park: charitable trust

A charitable trust is essentially a way to set up your assets to benefit you, your beneficiaries and a charity — all at the same time. A charitable trust could offer many financial advantages for philanthropically minded individuals with nonessential assets, such as stocks or real estate.

But how do such trusts work? Explore the basics and benefits of charitable trusts and find out if one is right for your needs.

Charitable Trusts 101

There are two primary types of charitable trusts: charitable lead trusts and charitable remainder trusts. These trust types mirror each other but serve different needs. One thing they have in common is that the chosen charity or charities must qualify with the Internal Revenue Service (IRS) to receive charitable deductions according to the type of trust and terms you select.

  • Charitable lead trust: This trust type first distributes a portion of its proceeds to a charity, for which you'll receive a charitable donation tax deduction equal to those payments. The remainder of the principal is then distributed to your beneficiaries.
  • Charitable remainder trust: With this trust type, you choose to receive an income from the distribution of the non-income-producing assets you placed into the trust first. You'll also receive a charitable donation tax deduction based on the present value of the remainder of the assets earmarked for the charity. At the end of the term or upon your death, your chosen charity receives the rest of the assets.

Typically, once you move your assets into a charitable trust, it sells the assets and distributes them according to the trust type and the terms you select. Once created, a trust is irrevocable — even if you were to suffer a personal or business financial loss. These trusts have many moving parts, and it can help to speak with a financial representative to learn more about how a trust could fit into your financial plan.

Benefits of Giving

When you give to charity, you can make an impact on the world around you — and a charitable trust could help you continue to give long after you are gone. It's also one way to put your plans for giving to good work.

Setting up a charitable trust can have many tax incentives and financial benefits for those who want to set aside any high-value assets they don't need to support themselves in retirement. By moving these assets into a charitable trust, you can avoid paying capital gains on real estate or stocks when they're sold at a higher present value.

Both types of trusts effectively reduce your estate through charitable donation, which helps reduce estate taxes. They also eliminate probate for your beneficiaries. At the same time, a charitable trust can create an income stream for you and an inheritance for your beneficiaries while you're still alive using the non-income-producing assets you already own. For both types of trusts, you earn the charitable tax deduction, according to current IRS rules, while leaving a portion of these assets to a charity or several charities.

Charitable Trust Tactics

Within each of the different types of charitable trusts, there are many options to consider and strategies for maximizing their benefits.

Here are two common strategies:

  • Set up a donor-advised fund: You don't have to choose your charity beneficiary when you create your charitable trust. Instead, you can create a donor-advised fund to direct payments from a charitable lead trust or charitable remainder trust to whatever charity (or charities) you eventually select. This gives you the flexibility to change your mind about a charity or add a new charity.
  • Replace assets for beneficiaries: You have choices for the income a charitable remainder trust creates for you from the sale of your non-income-producing assets. Those looking to leave an inheritance for their beneficiaries, for example, can buy a life insurance policy and use the income produced by the charitable remainder trust to pay the policy premiums while still using the remainder to fund charitable intentions.

Creating a charitable trust could be a useful, multipronged approach to leaving a legacy. It allows you to set aside money for both a charity and your beneficiaries, realize specific tax advantages — and have a say over how and when any income should be distributed while you're still alive.

IMPORTANT DISCLOSURES

Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

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